O.C. Venture Capital Drops 23%--Hot Spots Elsewhere
Critical funding for Orange County’s start-up technology companies has trailed off dramatically this year, as investors turned to other high-tech hot spots, a data firm reported Thursday.
While venture capitalists poured record amounts into new businesses throughout the nation, they cut back their high-risk spending in Orange County by 23%, to $239 million, in the first three months. It was the second straight quarter that venture funding has declined here.
Analysts said more investors have been bypassing the county for Internet and telecommunications start-ups that abound in the Los Angeles and San Diego regions.
As a result, Orange County’s share of the venture capital bounty in Southern California has fallen to 14%, less than half of what it was last fall, according to data from the National Venture Capital Assn.
If the downward spiral continues, economists warned, it could have far-reaching consequences in Orange County, which is bidding to establish itself as a hub for technology companies.
“The creation of new businesses is the engine of growth in Orange County,” UC Irvine economist Dennis Aigner said. “If businesses can’t get funding, ultimately the entire local economy will slow.”
Entrepreneurs in search of funding might decide to move, taking with them potential jobs, tax dollars and cutting-edge products and services. Others may never get their innovations off the ground, or may simply shut their firms down.
Although Aigner says Orange County’s funding dip may be temporary, others say the county has lost some of its appeal among venture capitalists.
Business Incubators Called One Factor
Fewer dollars are winding up in the county’s leading tech industries, such as medical devices, health care and data storage, said Harry Lambert, general partner at InnoCal, a Costa Mesa-based venture firm.
InnoCal hasn’t written off Orange County, he said. The venture firm, which has $200 million under management, is considering investing in local start-ups--in the Internet arena.
But he added: “Whether the county gets anywhere near the lofty investment levels of Los Angeles or San Diego is probably doubtful.”
Venture capitalists plow money into start-ups, in return getting a major share of the companies. The investors are betting on a big payoff when the start-ups go public or are snapped up for a handsome price.
Eric Harrison, a partner with Crosspoint Venture Partners in Irvine, said Orange County has failed to excite investors as much as Los Angeles and San Diego have in recent years partly because of its lack of business incubators--low-cost centers that help entrepreneurs get on their feet. The region’s best-known incubator, Idealab in Pasadena, has attracted millions of dollars for Internet upstarts.
By contrast, Orange County’s incubators are just taking root. Indeed, there were no incubators in the county a year ago.
With interest rates rising and the stock market swooning in recent weeks, venture funding might be harder to come by for entrepreneurs everywhere. The technology-heavy Nasdaq market has tumbled about 26% since March 10 highs, and many venture capitalists are taking a harder look at new investments and scrutinizing those companies they’ve already invested in.
“I don’t think the VC community is blindly charging ahead anymore,” said Rick Kroon, chairman of the Sprout Group, an $860-million venture fund with offices in Menlo Park, Calif., and New York. “There was tremendous momentum in the first months, but by the end of the quarter, VCs started to do a little head scratching on valuations of companies and burn rates.”
Doubts About Internet Could Benefit County
Ironically, investors’ growing disenchantment with many Internet ventures could benefit Orange County’s technology segments, such as biotech and computer communications, said Rohit Shukla of the Los Angeles Regional Technology Alliance.
Tom Clancy of Enterprise Partners, a Newport Beach venture capital firm, also expects Orange County to bounce back.
“There’s a highly qualified work force, good schools and so on,” he said. “I think Orange County remains an extremely attractive area to locate a company.”
Venture funding in Orange County peaked at $337 million in the third quarter last year, surging along with the nationwide boom in new money for high-tech ventures. For the entire year, start-ups garnered $929 million in venture funds, according to the report, which doesn’t include funding in the earliest stages of a start-up by “angel” investors.
So far this year, venture capitalists have invested a total of $22.7 billion nationwide, easily on pace to top the record $50.7 billion invested during all of 1999.
But Orange County has failed to keep pace. Only 19 local companies received these funds during the first quarter, the lowest number in more than a year, the survey found.
Only a handful were so-called dot-coms. The companies that received the biggest backing, $60 million each, were Exult Inc., an Irvine provider of Internet-based human resources services, and Costa Mesa tool seller White Cap Industries.
Staff writer Debora Vrana contributed to this report.
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Less Ventured
Venture funding for Orange County innovations dropped for the second straight quarter, as a greater share of high-risk money went to other entrepreneurs in Southern California. Quarterly figures, for this year and last:
Orange County
Quarter 3, 1999: 336.6 million
Quarter 1, 2000: 239.0 million
Southern California
Quarter 1, 2000: 1.7 billion
Source: National Venture Capital Assn.
